Management Discussion and Analysis

WORLD AND INDIAN ECONOMIC SCENARIO

The global economy regained stability in 2013 and experienced robust demand in someadvanced economies like US, UK and Japan, aided by accommodative monetary policies. Goingforward, more support from fiscal and monetary policy easing shall give momentum tofurther growth. The sentiment amongst consumers and investors remain upbeat yet cautious.IMF forecasts global growth at 3.6% in FY 2014-15 and 3.9% in FY 2015-16.

India registered its lowest rate of GDP growth for the decade at 4.7% in FY 2013-14, ina decade. Demand slumped across all sectors and high inflation, high current accountdeficit, fiscal deficit and a sliding rupee impacted business environment. The servicessector showed a marginal decline to 6.9% in FY 201314. However, with declining inflationand a reined in fiscal deficit at 4.6% and CAD at 1.7% of GDP, the country is poised toconsolidate and grow steadily in the next fiscal.

INDIAN EDUCATION SECTOR

The education sector represents a broad spectrum of businesses, but it is generallydivided into three areas.

Exhibit 1: Core Segments

K-12 (from kindergarten to Year 12) and higher education. Pre-school, test preparation, tutoring and vocational training. Ancillary businesses
Heavily regulated, these represented more than half of India's $56 billion private education sector in 2012. Parallel businesses operating in areas with far less regulatory oversight. such as school books, stationery, multimedia, IT and management.

(Source: Asian Venture Capital Journal, May 2013)

CARE Rating pegs Indian education industry atRs.3.83 trillion and it is expected togrow rapidly owing to rising incomes, rapid urbanisation and increasing awareness aboutimportance of quality education.

The current spending on education isRs.1,035 for an urban household andRs.293 for arural household. However, consumers are willing to spend higher amounts if given access toquality education and this has brought private sector companies to the forefront. Theprivate sector is rapidly increasing its presence in the education market and currentlyaccounts for 48% of the total revenue. Realising the importance of private sector inIndian education, the Government has launched Public Private Partnerships (PPP) to growthe education sector.

Pre-school Education

According to a research report published in 2011 'Indian Pre-school Market Forecast',Indian pre-school market is experiencing rapid growth, even among small towns andnon-metros due to rising number of working mothers, increasing trend of nuclear familiesand escalating demand for high quality pre-school education for toddlers. The pre-schoolindustry has low market penetration with 1.1% enrolment in India as compared to Francewith 100% enrolment. Low barriers to entry along with the increasing awareness,popularity, and propensity of young working professionals to pay are likely to drivegrowth for the pre-school market which has grown at a CAGR of around 13% during 2011-2014and expected to grow at a CAGR of 30-35% going forward.

This provides the opportunity for education providers to enter pre-school education.New opportunities in the pre-school segment include teacher's training, inclusion of daycare services, provisioning of after-school extra-curricular activities and edutainmentproducts.

(Source: Asian Venture Capital Journal)

K-12 schools

Presently, there are around 1.5 million K-12 schools in India with a student base of253 million. With government spending (Centre and states combined) on education at 3.7% ofGDP, and schemes like Right to Education (RTE) and Sarva Shiksha Abhiyan (SSA), Near 100%GER in the primary level has been achieved. Nevertheless, there is a considerable drop-outrate for upper primary level and a gradual shift in enrolment from public schools toprivate schools at secondary level.

The private sector contributes to nearly 40% share in enrolment although it has a 25%share in the number of schools in the country. The cost of land, strict land usage normspaired with multiple licensing system and low or negative surplus make it challenging fora private school to operate.

Out of 1.46 million K-12 schools, 54% are managed by the Central Government/StateGovernments and 21% are managed by local bodies/municipal corporations. Private schoolsaccount for 25% of the total number of K-12 schools in India.

(Source: Ernst and Young)

Out of 253 million students enrolled in K-12 schools, 60% are enrolled in publicschools (153.5 million). Private school students account for a 40% share of studentenrolment in the K-12 universe (100 million).

The K-12 market, though regulated, offers a number of opportunities, especially in theinformal sector, such as automated learning platforms, integration of ICT in classrooms,diversification of information sector in formal K-12 market and integration of pre-schooleducation with primary schooling.

Private enrolment in elementary schools is approximately 35% and over 50% at thesecondary level. Studies in cities like Mumbai and Patna show that upward of 75% ofchildren in these cities are attending private schools. This trend holds true in ruralIndia as well. The Annual Status of Education Report (ASER) shows that enrolment inprivate schools at the elementary in rural India has increased from 19% to 29% in theseven year period from 2006 to 2013.

Exhibit 4: Education Sector Salient Features*

Total Current enrolment (Class 1-5) 13.24 crore, marginally lower than 13.47 crore in 2012-13# GER for 2010-11 116.0 for Class 1-5 and 85.5 for Class 6-8 Current Enrolment (Class 6-8) 6.64 crore, up from 6.49 crore in 2012-13

*Till September 2013

#Covering 1.52 million schools in India

(Source: Flash Statistics: Elementary Education in India: Progress towards UEE for theyear 2013-14 , NEUPA)

GROWTH DRIVERS

• Private schools are expected to grow at 4% requiring 130,000 additional schoolsby 2022. An ongoing and continuous evaluation, comprehensive curriculum and syllabi basedon practical applications, assessments based on interactive, skills and fun based learninghas led to better learning levels and quality of school education. Based on currenttrends, it appears that the private sector may account for a 55-60% share in overallenrolment in K-12 schools by 2022.

• There is an increase in awareness among urban parents that maximum learningoccurs in initial years and to give maximum exposure to learning at a pre-school stage.

• Better quality education will create an educated workforce for industryemployment, especially white collar jobs.

• The education market is characterised by favourable margins due to theexponential growth in fees, negative working capital and higher operating margins.

• The number of private players in K- 12 segment are also increasing with highertechnology and quality infrastructure being brought to the classrooms to facilitatelearning.

• Public private partnerships in the role of financing and providing educationservices.

• Passage of pending educational bills such as the National AccreditationRegulatory Authority of Higher Education Bill and National Council for Higher Educationand Research Bill.

• Crisil expects the share of organised pre-schools to increase from 20% in FY2012-13 to 26% in FY 2017-18. Large-scale expansion plans of existing companies and theentry of more organised firms should alleviate supply constraints in the segment. Theorganised pre-school market is expected to grow at a CAGR of 26% over 201318 fromRs.13.3billion to reachRs.42.8 billion.

CHALLENGES

• Regulatory hurdles in conforming with regulations, syllabus of the examinationboards

• High capital expenditure and operational costs for quality faculty,infrastructure and technology

• Long time frame is needed to create brand equity and increase enrolment

• Debt servicing challenges in the short term

INDIA'S K -12 SYSTEM

Higher Education (HE) - The Twelfth Five Year Plan has aimed at the threeobjectives of excellence, equity and expansion to harness the human capital of thecountry. India is slated to have the largest tertiary-age population i.e. in the age groupof 25-29 years by 2020, outpacing China. Enrolment in higher education still lies at18-19%, significantly lower and the government is making efforts to expand disciplines,enrolment and bring students from all sections of society to enrol into institutions, withbetter faculty, infrastructure, research and innovation ecosystem and greater industryengagement.

The HE market is flourishing with CAGR of 19% expected over the next couple of years.There is need to invest in setting up educational hubs and incubation centres, expandingexisting institutions, developing physical infrastructure, combining vocational educationwith mainstream education, making alternative use of premises and e-learning.

Pre-schools - Unlike K-12 school education and higher educational institutions,which are barred by law from becoming for profit ventures, pre-schools are allowed to makeprofit. Besides, no regulations or standards regarding the curriculum govern thepre-school market currently. This makes the industry free to operate on its own terms,which has also led to its highly unorganised nature.

COMPANY OVERVIEW

Tree House Education & Accessories Limited (Tree House) is the largestself-operated pre-school chain in India. It is known for qualified and experiencedteachers, standardised curriculum and quality education. Tree House has 490 preschoolcentres as on March 31, 2014 having opened 111 preschool centres last year. The Company isalso present in the K-12 school segment, especially at locations having a strongpre-school presence. There are a total of 24 operational K-12 schools where Tree Houseoffers school management services. Educational complexes in Baroda and Jhunjhunu havecompleted construction in FY 2013-14.

The Company offers Play group, Nursery , Junior Kindergarten (KG), Senior KG, vacationcamps, hobby classes, teacher training, Day Care facilities and teacher training coursesat its pre-school centres.

It provides a range of educational services to K-12 schools, which include designingcurriculum and providing teaching aids, supplying methods for imparting education,organising extracurricular activities for students and teacher training. The K-12 segmentrepresents 24 K-12 schools providing education from KG to Class XII.

Expansion plans

Being a trusted brand in the pre-school segment, Tree House ventured into K-12 schoolsegment. The Company has set ambitious growth targets which are expected to grow at a CAGRof 35.3% over 2012-2015. We are currently present in 63 cities, with new centres opened inBhopal, Jamshedpur, Mangalore, Durgapur, Bhubaneswar, Udaipur, Jodhpur and Amritsar inthis year.

The strong pillars of the Company's success are its teaching methods, teacher-studentratio, in-house teacher training and quality control.

Company's strengths

• Brand owned by company hence no royalty sharing, which increases competitiveposition vs. others and increasing earnings per centre with a self operated model

• Advantage of scale to leverage its operating costs and ad spends, thus allowingit to break even with lower students per centre

• Higher EBITDA margins with more student enrolment

• Attracting a superior talent pool of teachers due to the opportunity to workdirectly with company

• Turning in positive free cash flows with low earning fluctuations and higherreturn on capital (ROC)

• With Property sales the company will turn asset light

HIGHLIGHTS FOR 2013-14

• The Company has introduced Day Care services at some pre-schools and alsoentered into tie ups with large employers in the IT, ITES, banking and consulting space toprovide Day Care services for their employees.

• Tree House has tied up with SNDT University to collaborate on its teachertraining programme.

• The Company is sponsoring the gold medal for the topper in the Master of Science(early childhood education) at SNDT University, Mumbai. It aims to associate with moresuch education centres to promote an eco-system of pre-primary education.

• Started education advisory board headed by Dr. Prerna Mohite to provide keyacademic inputs

• Opened 5 pre-school centres in Mumbai under 'Global Champs' brand to provide lowcost quality pre-primary education.

• In June 2013, Tree House Education and Accessories gained ownership of theBrainworks Learning Systems Private Limited along with all assets.

FINANCIAL PERFORMANCE

The Company posted another year of excellent performance across all financialparameters, validating its strategy of creating multiple drivers of growth. The Company'sphilosophy of continuously improving the quality of education at preschool level hasresulted in sustained growth and profits.

Revenue

Gross Revenue for the year grew by 31.02% toRs.158.98 crores in FY 2013-14fromRs.121.34 crores in FY 2012-13. Net Revenue atRs.157.64 crores in FY 2013-14 increasedby 37.9% fromRs.114.28 crores in FY 2012-13.

EBITDA

Operational EBITDA atRs.89.23 crores has grown y-o-y by 44.36% fromRs.61.81 crores lastfiscal year. EBITDA margins rose 252 bps from 54.08% to 56.60%.

Profit Before Tax

Profit before Tax increased by 35.08% fromRs.48.87 crores toRs.66.02 crores in FY2013-14.

Net Profit

Net Profit atRs.43.92 crores in FY 2013-14 grew fromRs.33.33 crores in FY 2012-13,registering a growth of 31.8%.

Earnings per Share

In FY 2013-14, Earnings per Share (fully diluted) isRs.11.84 in 2013-14 comparedtoRs.9.56 in FY 2012-13.

Dividend

The Board of Directors is pleased to recommend a dividend ofRs.1.50 per share (previousyear:Rs.1.25 per share) for the year ended March 31, 2014. Total cash outflow in thisregard will beRs.6.52 crores (previous year:Rs.5.23 crores) including dividenddistribution tax ofRs.0.95 crores (previous year:Rs.0.73 crores).

Reserves

As on March 31, 2014, the balance in the Security Premium has increased toRs.265.52crores (previous year:Rs.239.90 crores) and balance in the Profit and Loss Account surplushas increased toRs.91.85 crores (previous year:Rs.57.48 crores). During the year thecompany has transferred a sum ofRs.3.03 crores to General Reserve from Profit and Lossaccount balance.

The Company has never accepted any fixed deposits and thus there was no outstandingtowards unclaimed deposit payable to depositors as on March 31, 2014.

RISKS

The Company has adequate Risk Management systems, based on three pillars, Business RiskAssessment, Operational Controls Assessment and the Policy Compliance process. The Companyfaces competition risk from local players in the cities it expands into. This risk iseffectively addressed by building a brand, vintage and processes to provideconsumer-centric services and quality education. The Company addresses major risksidentified by the business functions on a continual basis and mitigating them throughappropriate actions. These risks are discussed with both the Management Committee and theAudit Committee.

Below mentioned are certain specific risks that the Company has faced and the methodsof mitigating them:

RISK MITIGATION STRATEGY
Geographical concentration Risk Around 42 % of pre-school are located in and around Mumbai metropolitan Expansion of pre-schools on a large scale across different regions and reducing the risk of geographic concentration
Regulatory Risk The Government of India introduces regulations for pre-school segment may impose restrictions on the Company Complying with all local municipal laws, proactively incorporating all regulations, as the Company has clarity on the regulatory framework
Competition Risk Competitors providing similar services and infrastructure set up operations because of the low barriers to entry into the education sector Having revolutionised pre-school pedagogy in India, we continue to increase use of innovative teaching methods and child-focused personal care, better technologies and activities

HUMAN RESOURCE MANAGEMENT

Tree House has a very sound and an efficient team of professionals. A lot of emphasisis laid on training and development so that leaders can emerge. The training anddevelopment initiatives are also targeted towards creation of an extensive talent pool.Incessant communication with the employees and franchise is done via emails and variousmeetings are conducted. We give preference to internal development and internal hiring forsenior levels and also offer full range of benefits after retirement.

Tree House has an open and friendly environment where everyone has access to seniorsacross all levels. We give support and empower our employees to work with passion,dedication and embrace innovation in all their work activities. We ensure safety for ourall-woman teaching staff with 24x7 security. We attract talent with better pay-scales thanindustry norms.

We focus on treating every employee with respect and dignity and have a merit-basedevaluation process. Our robust ESOP policy ensures long term commitment from our key HRassets. Our total staff strength is 1,965 and teacher strength is 1,880 at the end of FY2013-14.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company maintains proper and adequate systems of internal controls to safeguard allassets, authorise all transactions, ensure accurate recording and reporting and ascertaincompliance with policies and statutes. The Company's Audit Committee comprising theCompany's Directors is the principal constituent of our internal control system. It meetsregularly to review the quarterly report submitted by the Internal Auditors and implementsall suitable suggestions. The Company's statutory auditors also check the internal controlsystems in the Company and give their suggestions for updating systems and procedures.

CAUTIONARY STATEMENTS

Statements in this Management Discussion and Analysis describing the Company'sobjectives, projections, estimates and expectations may be 'forward looking statements'within the meaning of applicable laws and regulations. Actual results might differsubstantially or materially from those expressed or implied. Important developments thatcould affect the Company's operations include a downtrend in consumer spending.